Caveat Emptor by Charles
R. Sowell

The
following article was written by Charles R. Sowell, General Counsel for
the Alabama Real Estate Commission, and originally
appeared in the Alabama Real Estate Commission Newsletter: UPDATE,
Fall 1993. The entire article
is provided with
permission of the author.

It should be noted that Caveat
Emptor
and the following
article relate ONLY to people buying & selling houses
in the state
of ALABAMA and their agents.

Caveat emptor is a
latin
phrase which means "let the buyer beware." This phrase is the basis of
the controlling legal doctrine in the sale of used houses with material
defect. It was most prominently
set out by the Alabama Supreme Court in the landmark case styled Cashion
v. Ahmadi, 345 So.2d 268 (Alabama 1977) and was further
addressed in
a case styled Ray v. Montgomery, 399 So.2d 230
(Alabama 1980). Several
cases have appeared since 1980 dealing with the principle of caveat
emptor.
These cases taken together with Cashion and Ray
set out the
law in this area, and it can be a bit difficult to follow. I am going
to
try to simplify the cases and explain what they generally mean to
sellers,
agents, and buyers.

First,
it is important to
remember that the court in a 1971 case abolished caveat emptor in the
sale of new homes,
but the court has on several occasions reaffirmed that caveat emptor is
the law in used home sales. Caveat Emptor does not apply to the sale of
new homes.

In the Cashion
case the buyer of a used
home sued the seller and the listing agent after the buyer discovered
that
the basement leaked. The buyer was not successful because the court
applied
caveat Emptor and said in effect that neither the seller nor the
seller's
agent had an affirmative duty to disclose a material defect in the
home,
unless the defect was known and could adversely affect the health or
safety
of the buyer. Affirmative duty means voluntary disclosure without being
asked.
A material defect is best defined as one which would be a significant
factor
in a buyer's decision to buy or not buy a particular house.

This
case was followed by Ray
where the buyer sued the seller after discovering that the used house
purchased had termite damage so extensive that it threatened the
structural integrity of the house. The house was sold "as is." The
court held in favor of the seller, citing caveat emptor. The court said
the damage seemed sufficient to be "health or safety" consideration,
but the buyer still had no case because the condition could have been
discovered by the buyer with ordinary diligence by inspection of the
house.

Most of
of the lessons of
caveat emptor should be obvious. When a buyer who finds after a sale
that the used house purchased
has a material defect, neither the seller nor the seller's agents will
be responsible unless the buyer can prove the following:

1) There was a
material defect
which adversely affects health or safety;

2) The seller or the
seller's
agents knew of the defect before the sale;

3) The defect was such
that it
could not be discovered by due diligence; and

4) The house was not
bought
"as is."

A
buyer's agent who knows of
material defects is in a very different position. Agents of the buyer
have a responsibility under the law of agency to tell the buyer
everything known about a transaction.
Caveat Emptor does not apply, and offers no protection to agents of the
buyer.

It must
be noted that the
court has used language
which seems to indicate that a known, latent defect involving health or
safety might not be covered by caveat emptor. A latent defect is one
that
is hidden or not apparent on the surface and, therefore, cannot be
discovered
by due diligence.

The
principles of caveat
emptor do not allow a seller or the seller's agents to engage in fraud,
or deceit, or to make misrepresentations about the condition of the
property. The law is clear that when a buyer asks a question about a
specific property condition, the answers must be truthful and complete.
Likewise, a seller or seller's agents can be liable for fraud if they
knowingly take actin to conceal a material fact with intent to deceive
or mislead the buyer. Misrepresentations and fraudulent
action are very different from simply remaining silent about matters
one
has no duty to disclose.

Section
24-27-36(a)(3) Code
of Alabama
1975, as amended, provides that a real estate licensee may have his or
her license revoked for "...failing to disclose to a potential
purchaser...any latent structural defect or any other defect known to
the licensee..." Does this somehow conflict with all the case law on
caveat emptor? The answer is no. It is the job of the courts to flesh
out and apply statutes such as
this one to real life situations. The courts have spoken specifically
to
the duties of agents in these cases. The law is what the cases say it
is.

Finally,
the purpose of this
article is to state what the law is, and how it is applied to those
having roles in used residential real estate transactions. The
Commission is bound by the law in its enforcement actions. Real estate
licensees who operate within the law, even if only the minimum
requirements of the law, are free to rely upon caveat emptor in their
business dealings. Many companies do not agree with the results of the
principles of caveat Emptor, only accepting listings on homes where the
owner consents to full disclosure about the condition of the
house being sold. These companies are certainly free to exercise this
business
judgment.

Again,
it should be noted that Caveat Emptor and the preceding article relate
ONLY to people buying & selling houses in the state of ALABAMA
and their agents.